As Creditors Spar, Athens Waits for Next Slice of Aid

The International Monetary Fund, criticized for decades for prescribing harsh medicine to heavily indebted governments, is pressing reluctant euro-zone governments to go easy on Greece.

It is a fight the IMF will be hard-pressed to win. It is scaling down the money it lends to Greece, and, as it does so, its influence weakens. It has lent Greece about €22 billion ($28 billion), and has set aside another €26 billion to lend until 2016. The country's main creditor group—the 16 other euro-zone governments led by Germany—are calling most of the shots.

IMF officials have repeated that they want to see a realistic agreement in place to back up the release of a new slice of Greek aid.

The institution has become increasingly skeptical about the euro zone's prescription of slashing budgets to get debts under control because it has exacted a heavy toll and destroyed economic growth.

It also argues that the credibility of Greece's economic program—and returning the economy to health—hangs on getting Greece's debt down to manageable levels.

Many in the organization see the IMF's own credibility on the line. Its main sanction—pulling out of the Greek program—would deal a confidence-shattering blow to the effort to control the debt crisis across the euro zone.

The euro-zone governments' priority is very different: to minimize the cost of aiding Athens.

They refuse to extend more loans to Greece beyond those already pledged. Now Greece's largest creditor group after a private debt restructuring this year, the governments are also refusing to countenance the IMF's favored solution of "official-sector involvement," or OSI—jargon for cutting the debts they are owed by Athens.

After months of simmering below the surface, the divisions surfaced in public on Monday night.

After attending a meeting of euro-zone finance ministers, IMF Managing Director
Christine Lagarde
made clear the Washington-based institution's concern about Greece's heavy debts. Sitting to her right at a news conference,
Jean-Claude Juncker,
the Luxembourg prime minister who presides over the ministers' meetings, made equally apparent his view that the route to OSI, arithmetically the easiest way to reduce Greece's debts, is closed.

Mr. Juncker said creditors would probably agree to move back to 2022 the date when Greece's public debt falls to the supposedly sustainable level of 120% of annual economic output.

Ms. Lagarde begged to differ. "What we regard as critical…is that the Greek debt be sustainable. In our view, the appropriate timetable is 120% by 2020," she said. That way, the country would get back on its feet and return to private debt markets quicker.

Many experts are skeptical that Greece will be able to repay its debts under any of the current proposals. Although his country is resisting debt concessions, German Finance Minister
Wolfgang Schäuble
admitted Tuesday that even making the claim that such a high debt load eight years down the line was sustainable for Greece posed "a certain challenge."

The differences over the release of the next slice of Greek aid—which Mr. Schäuble said could be as much as €44 billion—provide insight into one of the most complicated aid programs in history. Not only must Greece deal with the demands of the IMF and other governments, but the European Central Bank also has a say, along with the European Commission, the European Union's executive arm. That makes finding compromise among the creditors enormously difficult, and to many of their arguments Greece is a mere spectator.

One senior European official said any deal must meet three criteria that often conflict: the aim of governments to keep concessions to Greece to a minimum, the IMF's concern about its own credibility, and the desire to make the final agreement believable to financial markets.

Some analysts doubt that the disagreements will hold up the next portion of aid, which should be formally agreed upon by finance ministers by the end of the month. That will go to a vote in as many as seven national parliaments, including Germany's, before it can be paid out, probably in December.

However, the issue of Greece's heavy debt burden is unlikely to go away.
Mujtaba Rahman,
an analyst at the Eurasia Group in New York, said the IMF efforts will pave the way for an assertive push for official debt relief next year.

"The IMF is preparing the ground for the next conversation when the Greek problem resurfaces. They recognize there's no serious appetite for official creditor write-downs among euro-zone countries at this point," he said.

Underneath all these technical discussions is a country awaiting aid. Greece avoided a default on its debt Tuesday when it successfully, and with the ECB's sanction, auctioned Treasury bills that will allow it to repay some maturing debts.

Waiting for aid, the government has managed its finances by delaying payments to suppliers.

Meanwhile, as the economy enters its sixth year of recession, the governing coalition in Athens has bled support in recent weeks as the Greek Parliament has passed measures, including more budget cuts, to secure the aid payment. That may be building up risks for next year.

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